(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)
T2108 Status: 72% (seventh day of overbought period)
VIX Status: 35 (up 16% and back to the middle of the previous trading range)
General (Short-term) Trading Call: Hold (assumes few bullish positions, small bearish position, cash from selling bullish positions at higher prices as recommended)
Commentary
Yesterday’s bullish divergence was not even good for a snapback rally today. Instead, the S&P 500 continues to slide on a fast track to the anticipated test of the 50DMA. Today’s 2.8% loss brings the index within a 1.5% loss of the test. This rapid reversal from overbought extremes is eerily reminiscent of the sharp declines from overbought extremes early in 2011.
T2108 should drop out of overbought territory on a 50DMA test. Nibbling on some bullish positions will be OK, but I would stick to index plays. The rapid 2-day drop and extremely sharp rise in volatility (the VIX) warn us not to even think about getting aggressive.
“Euro stocks” are an important exception to me. European shares were severely hammered today, signaling to me that it is time to tentatively accumulate those shares again. I re-initiated positions in EWG, the iShares MSCI Germany Index ETF, Siemens Aktien (SI), and I even grabbed some Deutsche Bank AG (DB). I will not add to these positions unless the U.S. market dives into oversold territory.
While I am lamenting the quick switch from nice profits to a sizeable loss on my VXX puts, I doubled down (actually added 3:2) anyway. Today’s 14% rise could easily be tomorrow’s 15% drop. My expectations of a rapid drop in volatility remain. However, trading over the past two days demonstrate that the market remains easily spooked and extremely circumspect of anything European. We will continue to treat this emotive behavior as an opportunity.
At the same time I added VXX puts, I sold half of my SDS position. I am maintaining my bullish dollar currency positions a little longer than I originally anticipated given the virulent decline in the euro and the prospects for additional yen intervention from Japan.
Overall, my assessments generally do not change.
Charts below are the latest snapshots of T2108 (and the S&P 500)
Refresh browser if the charts are the same as the last T2108 update.
Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Weekly T2108
*All charts created using freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108
Be careful out there!
Full disclosure: long SDS, long puts on VXX, net long U.S. dollar, net short yen and euro; long SI, DB, and EWG shares and calls